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Covid-19 – Force majeure and property contract implications

As the impact of Covid-19 continues to disrupt trade and commerce around the world, both businesses and individuals are trying to comply with their obligations under contracts already in place. This includes contracts relating to property, under which rent continues to fall due to landlords whilst their tenants’ cash-flow may have been disrupted.

This situation has brought force majeure clauses into focus.  It raises the question of whether such provisions can be triggered in order to excuse parties from performing their contractual obligations.

Key Points

  • Force majeure clauses are invoked when an extraordinary event beyond the parties’ control takes place which may affect a party’s ability to deliver its side of the contract.
  • The potential effect of a force majeure clause is the termination of the contract, a delay of performance or non-performance without incurring damages.
  • Whether Covid-19 will fall under the definition of force majeure will depend on the drafting of the relevant clause and its interpretation.
  • The party intending to rely on the force majeure must comply with all the procedural requirements noted in the contract.
  • Rent cesser provisions may also be invoked to help tenants.
  • The doctrine of frustration may apply if the contract does not contain a force majeure clause.

Force majeure clauses

A force majeure clause may enable parties to a contract to be discharged from complying with their obligations or secure an extension of time for performance under the contract without giving rise to any liability for damages.

Termination of the contract is also an option, especially when the delay or the inability to perform its obligations is continuous and long term.

The concept of force majeure includes ‘acts of God’, i.e. natural disasters such as earthquakes, and acts of man that are unforeseeable in nature.  The relevant clauses typically list the specific events that fall under the contract’s definition of force majeure, as well as the potential consequences that each party will be subject to.

Covid-19 as a force majeure

As Covid-19 is a new virus that emerged only a few months ago, it is doubtful that contracts already in effect refer to it explicitly.  Covid-19 is more likely to be covered by a force majeure clause which, for instance, lists epidemics, pandemics or acts of government as events falling under the definition.

Where none of these events are listed, whether Covid-19 is covered by the force majeure clause will be a question of interpretation.  Did the original parties to the contract intend the clause to cover events such as epidemics, closed borders, national quarantines or business lockdowns?  This will turn on the wording of the specific clause and whether the events listed were meant to be exhaustive or not.

The party that intends to rely on the force majeure clause must show that Covid-19, or the government’s response to it, constitutes an event that is ‘beyond any reasonable control’ and could not have been ‘reasonably contemplated’ when the parties entered the contract.  Since the outbreak of Covid-19 caught both businesses and governments off guard, and its impact has been unprecedented, the courts may adopt a more lenient approach than usual in relation to this sort of contract wording.

Exercising a force majeure clause

Parties intending to rely on force majeure during Covid-19 must bear in mind that these clauses are not triggered automatically.  Any procedural requirements noted in the contract itself, such as the obligation to serve notice to the other party in order to inform it of an intention to invoke the provision, must be complied with.

The party intending to rely on the clause must prove that Covid-19 is indeed the reason for the relevant delay or inability to perform the contract as agreed and that the consequences caused by the situation are beyond their control and they took all the reasonable steps to mitigate them.

Given the mandatory measures imposed by the government and worldwide impact of the situation, it should be relatively straightforward to prove these elements in many cases.

Rent cesser clauses

Rent cesser clauses stipulate that when business premises close due to an insured risk the business may be entitled to a rent-free period.  Such lease provisions would be helpful for tenants in the current circumstances, as the tenant would not need to pay rent for a period of time while not being able to use its premises in the usual way.  The landlord should not be adversely affected, as it should be insured against this loss of rent.  Rent cesser clauses may also help landlords by enabling their tenants to get through the current situation until they can trade as normal again.

However, whilst most landlords’ insurance policies cover damage that has been suffered to the premises itself, it is unlikely that will apply to epidemics, pandemics, or the actions of the government in response to them.  However, as each tenancy is distinct and unique, in order to reach an accurate conclusion the relevant lease must be examined, often together with the terms of the relevant insurance policy.

Frustration

A contract which does not include a force majeure clause may still be terminated through the doctrine of frustration.  Frustration applies to contracts that have become impossible to perform due to a supervening event that alters the circumstances of performance radically.  As a result, the parties are no longer required to perform their obligations as per the contract.

The case of Canary Wharf (BP4) T1 Limited & Others v European Medicines Agency [2019] EWHC 335 (Ch.) confirmed that leases can be frustrated (although that lease was not frustrated by Brexit).  The narrow interpretation in that decision and in case law generally indicates that the Covid-19 situation may be unlikely to give rise to frustration.  Tenants are not currently prevented from occupying their property, rather they are unable to trade profitably from them.  Even if the government’s restrictions become stricter, this may still not constitute frustration if those restrictions are temporary.  Frustration would also terminate a lease, which may not be the result the tenant is looking for.


Disclaimer

This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.

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